How to read a mutual fund prospectus

Advice offered by Marc Hebert, a founder of The Harbor Group Inc. The company is a registered investment advisor. If you have any questions about finance or if you’d like to suggest a future topic, email [email protected] are a lot of choices regarding which mutual funds to invest in. Consider that the US has more than 7,400 mutual funds available! It can be overwhelming to choose the one that is best for your investment goals. People make these choices based on various factors including performance, objectives, risk, and fees. Where is the best place to get these details? The mutual fund prospectus is one of the best places to start. A prospectus can be obtained from a mutual fund’s website or your financial advisor. It contains the details on the fund and is free. As it is a legal document, there is some legal language to navigate around. While the exact details can be different depending on the fund, the same general information is always there. If you aren’t into reading the sometimes extensive document, a summary form is available, as well. You will also find information on the investment objectives. This is the financial goal a fund will try to meet for its shareholders. It could be income, for example. It might be trying to generate interest or dividends for stockholders. It could be growth and capital appreciation. The prospectus will highlight the information you need to review the holdings the fund has chosen to meet the fund’s objectives. The fund objectives cannot be changed unless the shareholders vote to do so. The fund’s objectives need to meet your own. For example, a fund with growth as an objective may not meet the needs of an investor looking for current income. Here are just a few items to look for: Market riskOften, from reading the prospectus, you will find clues as to how the company reacts to the markets. If the overall market declines, how will the price of a particular fund react? Interest ratesHow does a fund react to changes in interest rates? If interest rates rise, does the value change? Business or issuer rate riskThis is the risk that a business that a fund invests in will go bankrupt or out of business entirely. Concentration riskThis refers to how heavily a fund is invested in one company. If a fund is not diversified, it may place too much of its performance on how a single asset within its fund will perform. Inflation riskThis refers to how the fund will react with changes in inflation. Will it keep pace with rising prices? Credit riskWill the debtor be able to pay its interest and principal payments? If a fund holds debt instruments, it is an important variable to review. Country riskThis is the risk of investing in a particular country. Country risk could encompass political, economic, or exchange-rate influences, for example. –You will need to understand these risks and how they fit into your investment strategy. Your overall portfolio needs to meet certain risk parameters that you are comfortable with. The prospectus will also detail any fees associated with owning the fund and the fund management. These can have a significant impact on investment performance over time. Each prospectus will disclose the performance over the past 10 years or since inception. You can then compare this to that of a relevant market index. However, the old adage is true: past performance does not necessarily predict future returns. Keep in mind that all investments are subject to risk. It may be worth more or less then its original cost at any given time. It is up to the investor to continually review all of the investment choices in his or her portfolio to see if they still might meet their objectives.

Advice offered by Marc Hebert, a founder of The Harbor Group Inc. The company is a registered investment advisor. If you have any questions about finance or if you’d like to suggest a future topic, email [email protected]

There are a lot of choices regarding which mutual funds to invest in. Consider that the US has more than 7,400 mutual funds available! It can be overwhelming to choose the one that is best for your investment goals. People make these choices based on various factors including performance, objectives, risk, and fees. Where is the best place to get these details? The mutual fund prospectus is one of the best places to start. The prospectus can be obtained from a mutual fund’s website or your financial advisor.

The prospectus is a document that the Securitas and Exchange Commission requires investment companies to provide investors. It contains the details on the fund and is free. As it is a legal document, there is some legal language to navigate around. While the exact details can be different depending on the fund, the same general information is always there. If you aren’t into reading the sometimes extensive document, a summary form is available, as well.

You will also find information on the investment objectives. This is the financial goal a fund will try to meet for its shareholders. It could be income, for example. It might be trying to generate interest or dividends for stockholders. It could be growth and capital appreciation. The prospectus will highlight the information you need to review the holdings the fund has chosen to meet the fund’s objectives. The fund objectives cannot be changed unless the shareholders vote to do so.

The fund’s objectives need to meet your own. For example, a fund with growth as an objective may not meet the needs of an investor looking for current income.

Here are just a few items to look for:

Market risk

Often, from reading the prospectus, you will find clues as to how the company reacts to the markets. If the overall market declines, how will the price of a particular fund react?

Interest rates

How does a fund react to changes in interest rates? If interest rates rise, does the value change?

Business or issuer rate risk

This is the risk that a business that a fund invests in will go bankrupt or out of business entirely. What are the financial setbacks the investments within a fund could sustain?

Concentration risk

This refers to how heavily a fund is invested in one company. If a fund is not diversified, it may place too much of its performance on how a single asset within its fund will perform.

Inflation risk

This refers to how the fund will react with changes in inflation. Will it keep pace with rising prices?

Credit risk

Will the debtor be able to pay its interest and principal payments? If a fund holds debt instruments, it is an important variable to review.

Country risk

This is the risk of investing in a particular country. Country risk could encompass political, economic, or exchange-rate influences, for example.

You will need to understand these risks and how they fit into your investment strategy. Your overall portfolio needs to meet certain risk parameters that you are comfortable with.

The prospectus will also detail any fees associated with owning the fund and the fund management. These can have a significant impact on investment performance over time.

Each prospectus will disclose the performance over the past 10 years or since inception. You can then compare this to that of a relevant market index. However, the old adage is true: past performance does not necessarily predict future returns.

Keep in mind that all investments are subject to risk. It may be worth more or less then its original cost at any given time. It is up to the investor to continually review all of the investment choices in his or her portfolio to see if they still might meet their objectives.

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